James v Ash Electrical Services Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - alleged insolvency - application for dismissal of winding up application on grounds of want of prosecution or abuse of process - whether plaintiff dilatory so as to justify termination of proceedings - whether shown that plaintiff's purpose is otherwise than to prosecute application to conclusion

Building and Construction Industry Security of Payment Act 1999 LEGISLATION CITED : Corporations Act 2001 (Cth), s 459C(2)(a) Uniform Civil Procedure Rules 2005, rule 12.7(1)

Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966; (2007) 213 FLR 450 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74 CASES CITED : James v Ash Electrical Services Pty Ltd [2008] NSWSC 1112; (2008) 220 FLR 328 TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509

PARTIES : Craig James - Plaintiff Ash Electrical Services Pty Limited - Defendant

COUNSEL : Mr D A Allen - Plaintiff Ms A Tsekouras - Defendant

SOLICITORS : Proctor & Associates - Plaintiff Peter Merity Solicitor Pty Limited - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4308/08 CRAIG JAMES v ASH ELECTRICAL SERVICES PTY LIMITED JUDGMENT 1 These winding up proceedings were commenced by originating process filed on 20 August 2008. It will be convenient to refer to the plaintiff as "Mr James" and the defendant as "Ash". 2 The application identifies insolvency as the sole ground on which winding up is sought. Filed with the originating process was an affidavit of a process server as to service of a statutory demand on the defendant on 21 July 2008. In due course, the question whether that statutory demand had been duly served became the subject of an order for separate determination. On 24 October 2008, I determined that the statutory demand had not been duly served: see James v Ash Electrical Services Pty Ltd [2008] NSWSC 1112; (2008) 220 FLR 328.

3 As a result of this decision, Mr James did not have the benefit of any presumption of insolvency under s 459C(2)(a) of the Corporations Act 2001 (Cth) and faced the task of proving insolvency of Ash by other means. 4 Now before me for determination is an amended interlocutory process filed by Ash on 2 December 2008 seeking an order that the originating process be dismissed. In accordance with a direction of the court, Ash supplemented the amended interlocutory process by filing points of claim in relation to its twofold contention, first, that Mr James has failed to prosecute the proceedings with due despatch and, second, that the winding up proceedings are an abuse of the process of the court. 5 In relation to the want of prosecution aspect, Ash relies on rule 12.7(1) of the Uniform Civil Procedure Rules 2005:

"If a plaintiff does not prosecute the proceedings with due despatch, the court may order that the proceedings be dismissed or make such other order as the court thinks fit." 6 Ash points to the fact that, apart from an affidavit concerning service of the statutory demand - being the purported service that I held on 24 October 2008 to be defective - Mr James has served no evidence in support of the proposition that Ash is insolvent. This is despite the following directions made by the court: · a direction of 13 October 2008 that Mr James file and serve remaining affidavits by 15 October 2008; · a direction of 30 October 2008 that Mr James file and serve evidence in chief by 13 November 2008; · a direction of 1 December 2008 that Mr James serve affidavits on which he relies by 5 December 2008; · a direction of 8 December 2008 that any further affidavits in support of Mr James's winding up application be filed and served by 19 December 2008. 7 The second, third and fourth of these directions were made after the determination of the separate question on 24 October 2008 and therefore at a time when Mr James knew that he faced the task of proving insolvency without the aid of any presumption. 8 On 8 December 2008, when the fourth direction was made, counsel for Ash informed the court that an expert's report on the question of solvency had been commissioned. Counsel also said: "My instructions are that first of all there was one expert that was engaged. He promised to do the report. Then when it came last week she said she couldn't do it in time. And then last week Mr Condon was engaged and he's promised to do it before the 19th." 9 According to Mr James's solicitor, Mr Kekatos, Condon Associates, insolvency practitioners, were instructed by Mr James on 1 December 2008 to prepare a report about Ash. On that day, a number of documents produced by Ash were provided to Condon Associates (it is clear from the correspondence in evidence that documents had been given to Mr James' solicitors on 24 October 2008 following service of a notice to produce). The documents provided to Condon Associates included financial statements for the year ended 30 June 2008, a printout from Ash's general ledger for the period 1 September 2007 to 30 September 2008, BAS summaries from July 2007 to September 2008 and sales by customer summary for the period October 2007 to September 2008. 10 On 3 December 2008, Condon Associates wrote to Mr James detailing further documents they would need. 11 On 18 December 2008, Condon Associates wrote a further letter reading in part as follows: "I note that from the limited information available to me at this time, I will not be able to provide any Report as to the Solvency or otherwise of The Defendant until such further documentation has been provided to me. It is noted that in the time between my initial correspondence with Mr Craig James and today, I have been in correspondence with the Solicitor for The Defendant ('Mr Merity') in relation to the above proceedings. The Solicitor for the defendant has been more than cooperative with me and has advised that he will arrange for his client to provide the necessary cooperation to enable me to prepare my Report as to the Solvency of The Defendant. Further to the above, I note that Mr Peter Merity has also arranged to forward me a letter which advises Mr Anthony Berkman (the accountant for the defendant) to provide this office with all the assistance needed and any further information which may be required to enable me to complete my Report. Accordingly, at this time, I am not in a position to provide any form of objective Report as to the Solvency or otherwise of The Defendant at this time. However, subject to receiving all the required information from all parties, I anticipate that a Report may be prepared within three weeks from the date of the receipt of such information." 12 It appears that Ash's external accountant, Mr Berkman, forwarded a number of documents to Condon Associates on 20 January 2009 in response to a request of 5 January 2009. These matters are referred to in a letter of 23 January 2009 from Condon Associates to Mr Berkman saying that some previously requested documents had not been received and that some "anomalies" had emerged from the documents actually provided. There was then a request for more documents. 13 Mr Berkman sent something to Condon Associates in response to the request of 23 January 2009. This is shown by a letter from Condon Associates to Mr Berkman in which further requests were made. That letter is dated 5 February 2009, the day immediately before that on which I heard Ash's application. 14 It is thus clear that, while there has been default by Mr James in compliance with directions as to evidence (most recently, the direction of 8 December 2008), Mr James has, since 1 December 2008, undertaken efforts to have Condon Associates prepare a report as to Ash's solvency; that Ash, through its accountant, Mr Berkman, has been in correspondence with Condon Associations; that Ash, through Mr Berkman, has sought to give Mr James documents relevant to an undertaking of Ash's financial position; that Condon Associates has promptly assessed documents made available by Mr Berkman; and that, as of the day immediately before I heard the amended interlocutory process, Condon Associates had asked Mr Berkman for more information. 15 The steps Mr James has taken, as just described, began after the judgment of 24 October 2008 the effect of which was to show that he was not entitled to the benefit of any presumption of insolvency and would have to make a positive case of insolvency. About five weeks later, Mr James engaged Condon Associates to that end, having apparently engaged another expert at an earlier point. The course of events since 1 December 2008 shows that the expert retained by Mr James has been in correspondence with Ash's accountant with a view to obtaining necessary documents for review and assessment, that that accountant (presumably on Ash's instructions) has co-operated in the process and that significant progress has been made towards the preparation of Mr James' evidence. It cannot be said that Mr James has been idle since the complexion of the case changed on 24 October 2008. 16 It is, of course, noteworthy that Mr James failed on three occasions after 24 October 2008 to comply with specific directions for the filing and service of evidence. That is obviously something to be taken into account. But it does appear that Mr James had a genuine expectation that the expert first retained would complete the necessary assignment by early December 2008, which expectation was not realised, so that it became necessary to start afresh with Condon Associates.

17 In the circumstances I have described, I am not prepared to hold that Mr James has not proceeded with "due despatch" within the meaning of rule 12.7(1). There has been attention by Mr James to preparations to pursue the proceedings which has been within reasonable bounds of diligence. The power referred to in rule 12.7(1) is a discretionary power: see, for example, Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274. It is to be exercised according to the justice of the case, remembering that it is a drastic step to exclude from the court a plaintiff who has an arguable case; but also that a defendant can be prejudiced by delay.

18 It might be appropriate to exercise the power despite apparent activity towards bringing a case to trial if it appears that the activity was pointless and was in reality not calculated to bring the matter to trial at all. That is not the position here. On the hearing of Ash's motion, parts of its financial records were tendered and its sole director was cross-examined about Ash's financial position. It is clear that there is a real possibility that Mr James will be in a position in the relatively near future to put on evidence in support of the insolvency case he seeks to make. The material now before the court shows that there are matters concerning the solvency of Ash that, at the least, require investigation and explanation. It would not, in all the circumstances, be appropriate to put an end to the proceedings on the basis of want of prosecution. 19 I turn therefore to the alternative allegation made by Ash, namely, that the winding up proceedings are an abuse of the process of the court. In approaching that aspect, it is necessary to begin with some things that happened before the winding up proceedings were commenced. 20 Ash is an electrical contractor. It performed electrical work for A.P.I.D. (Australian Property Investments & Development) Pty Ltd and Mycorp Project No 24 Pty Ltd (now called Mycorp Projects Pty Ltd). I shall refer to these companies as "APID" and "Mycorp" respectively. Disputes arose. By a statement of claim filed in the District Court on 4 June 2007, APID and Mycorp sued Ash for damages for alleged breach of contract. The provisions of the Building and Construction Industry Security of Payment Act 1999 were also invoked. An adjudication under that Act was made in July 2007 against APID and in favour of Ash in the sum of $97,491.60. Judgment in that sum was entered in the District Court by Ash against APID on 23 July 2007. That judgment is put forward by way of cross-claim in the proceedings commenced by APID and Mycorp. 21 Mr Palasty is the sole director of both APID and Mycorp. In a letter on Mycorp letterhead dated 6 November 2008 and addressed to Ash's solicitor, Mr James represented himself to be the General Manager, Finance and Operations of Mycorp. Mr James' address in the originating process is the same as that of APID and Mycorp. 22 In July 2008, Mr James took from Lear & Smith Group Pty Ltd an assignment of a debt of $7,700 owed to that company by Ash. Notice of the assignment was given to Ash on 16 October 2008. It is that debt and that debt alone that gives Mr James standing as a creditor of Ash. The debt was also the basis for the statutory demand the subject of the decision of 24 October 2008. 23 On 20 August 2008, Mr James, relying on the assigned debt, commenced the winding up action. 24 The contention of Ash is that the real instigator of the winding up application is one or both of APID and Mycorp (or, at the human level, Mr Palasty who is the sole director of both those companies) or, at least, that the present plaintiff, Mr James, was acting in the interests of those persons in commencing the proceedings and continues to act in their interests by pursuing them. Ash maintains that Mr James, a general manager of Mycorp (and therefore a person who may be taken to be allied with Mr Palasty), took the assignment of debt from Lear & Smith in order to be able to initiate winding up proceedings against Ash for the benefit of Mycorp, APID and Mr Palasty. Furthermore, it is contended, this has been orchestrated for the purpose of putting pressure on Ash to be amenable to the wishes of APID and Mycorp in relation to the action those companies have initiated there against Ash in the District Court and the judgment that Ash has against APID. Ash's points of claim plead the following: "The plaintiff has commenced the Supreme Court proceedings in an attempt to defeat and/or apply unnecessary pressure on the defendant in relation to the defendant's claims in the District Court proceedings."

25 In support of this contention, Ash points to two occasions on which, in the context of discussions about the District Court proceedings, there was reference to a winding up action against Ash. Ms Sultana, a solicitor employed by Ash's solicitors, was told by Mr Ziman, the solicitor acting for APID and Mycorp in the District Court litigation: "We are also keen on settling. There is an application to wind up Ash Electrical." 26 This happened on 31 July 2008 at a meeting convened to investigate the possibility of settling the District Court proceedings. Mr Ziman attended by telephone. At that time, of course, no winding up application had been filed. 27 On 10 September 2008, Mr Ziman said to Ms Sultana in the course of a telephone conversation about possible settlement of the District Court proceedings: "There is an application to liquidate Ash Electrical." 28 A further connection is said to be shown by the fact (which emerges from correspondence between solicitors about the District Court proceedings) that Mr Palasty consulted Mr Ziman about the possibility of appealing against the separate question determination of 24 October 2008 in these winding up proceedings which, of course, was, in an immediate sense, something affecting the present plaintiff, Mr James, alone and of no relevance to his employer or the sole director of that employer or another company of which that sole director was also the sole director.

29 Ash also refers to a passage in an affidavit sworn by Mr Ziman on 8 January 2009 in the District Court proceedings, apparently for the purpose of explaining delay by APID and Mycorp in putting on evidence in those proceedings. Mr Ziman deposed: "The plaintiffs have not previously served expert evidence because, I am instructed, they were loathe [sic] incur [sic] substantial costs at a time when they believed that the Defendant would be liquidated."

30 Mr Ziman had made a similar statement in a letter to Ash's solicitors dated 8 October 2008 concerning the District Court proceedings: "We have told you in the last and do so again that our client is loathe [sic] to spend large sums of money on expert evidence at a time when your client is, according to our client, facing imminent liquidation."

31 Let it be assumed that it was at the instigation of Mr Palasty or in order to assist Mr Palasty that Mr James took the assignment of the $7,700 debt, issued the statutory demand and commenced the winding up proceedings; and that Mr James is prosecuting the winding up proceedings with the aim of obtaining the appointment of a liquidator and in the hope that that liquidator will, through lack of funds or for some other reason, not defend (or not vigorously defend) the District Court proceedings, so that benefit thereby accrues to the companies of which Mr Palasty is a director and to Mr Palasty himself. Would that purpose on the part of Mr James in pursuing the application for winding up make the proceedings an abuse of process?

32 Relevant principles were discussed by White J in Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966; (2007) 213 FLR 450. I had occasion in TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 to adopt and apply his Honour's reasoning. Reference may be made to paragraph [44] of White J's judgment and paragraphs [105] and [106] of the TS Recoveries judgment (see also Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74 at [172] and following).

33 Those cases were similar, in some respects, to the present case in that a person already involved in litigation with a company (or an associate of such a person) took an assignment of a debt owed by the company and used it as a basis for commencing winding up proceedings against the company. The cases make it plain that it is not an abuse of process to press such winding up proceedings to their conclusion in order to obtain an advantage that is the natural outcome of a winding up order and an order for the appointment of a liquidator, namely, that the incumbent management of the company is supplanted by the liquidator whose duty it is to discontinue the company's business except to the extent conducive to its orderly winding up and who might be disinclined, through shortage of funds or for some other reason, to pursue or defend for the company litigation that might otherwise have been pursued or defended. These outcomes are expected and ordinary by-products of a winding up order. A plaintiff seeking such outcomes by pursuing winding up proceedings does not commit an abuse of process. The purpose of a litigant who presses his or her case in order to achieve those results is "to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event". These are the words of Mason CJ, Dawson J, Toohey J and McHugh J in Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 526.

34 In the Australian Beverage Distributors case, it was found that the plaintiff pursuing the winding up application also had a purpose of embroiling the defendant company in litigation, thereby causing it to incur costs and taking up executive time - a purpose, in essence, of harassment and harrying. The plaintiff was motivated to pursue that purpose by separate litigation in which the defendant was sued by an associate of the plaintiff. To the extent that the defendant was distracted by the winding up proceedings from its defence of the other proceedings, an advantage accrued to the plaintiff's associate. Had it been the dominant purpose of the plaintiff in pursuing the winding up proceedings to secure, through harassment and harrying, an advantage for its associate in the other proceedings, there would have been a finding of abuse of process according to the principles discussed in Williams v Spautz. The dominant purpose in pursuing the winding up proceedings would then have been, in words used in the joint judgment in that case (at 526-527), "not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers".

35 Has it been shown that there is, in this case, a collateral and impermissible purpose of this kind as Ash alleges in its points of claim (see paragraph [24] above)? Ash maintains that it has. But the evidence before me does not allow any such conclusion to be reached.

36 I have referred to the two occasions on which, according to Ms Sultana (Ash's solicitor), Mr Ziman (the solicitor acting for APID and Mycorp in the District Court proceedings) spoke of the pendency of a winding up application in respect of Ash. The fact that he made those statements in the context of discussions about possible settlement of the District Court proceedings says no more than that he and his clients were aware of what Mr James was doing in these proceedings - or, in the case of the statement made on 31 July 2008, what Mr James was about to do. The fact that Mr Ziman and his clients were aware of Mr James's actions or intended actions says nothing about the existence of any purpose on Mr James' part other than pursuit of the winding up proceedings to their conclusion.

37 I have also referred to the fact that Mr Palasty consulted Mr Ziman about the possibility of an appeal against the separate question determination in favour of Ash in these winding up proceedings. Mr Palasty, the sole director of Ash's opponents in the District Court, is thus shown to be willing to assist the present plaintiff in pursuing the winding up application. But that does not indicate that some purpose of harassing or harrying Ash - as distinct from securing the installation of a liquidator of Ash - must be attributed to Mr James.

38 Finally, there is the fact Mr Ziman, in both his letter of 8 October 2008 and his affidavit of 8 January 2009 in the District Court proceedings, referred to the desire of APID and Mycorp not to incur substantial costs in those proceedings "at a time when your client, according to our client, is facing imminent liquidation" or "at a time when they believed that the Defendant would be liquidated". That does not indicate any purpose of harassing or harrying by means of the winding up proceedings. It indicates that APID and Mycorp are, as it were, standing by and waiting (or, perhaps more accurately, hoping) to see Ash pass into liquidation as a result of the winding up application being pursued by Mr James to a conclusion normal in such cases.

39 The fact that Mr James may be bringing these proceedings to assist Mr Palastry and his companies and that Mr Palasty may be in touch with Mr James about what he is doing and supportive of his endeavours does not of itself mean that there is an abuse of process. So far as Mr James' purpose in pursuing the proceedings is concerned, I cannot find on the evidence before me that there is a purpose beyond that of obtaining the final relief sought. No one can be seen to have indicated or implied to Ash that the winding up proceedings will be abandoned if it agrees to a particular course in relation to the District Court proceedings. No proposal in which compromise of the winding up application is in any way linked with the future of the District Court proceedings is shown to have been put forward or hinted at. No strategy based on financially embarrassing or debilitating Ash through the winding up action so that it changes its stance in the District Court has been proved. The evidence is consistent with Mr James' purpose being to prosecute the winding up application to its conclusion.

40 The abuse of process allegation is not made out such as to justify the peremptory termination of the proceedings that Ash now seeks. It may be that, at a final hearing, there will be more comprehensive evidence about Mr James' purposes and the reasons why he took the unusual and, from his own separate perspective, commercially odd step of acquiring a debt of modest proportions from a pre-existing creditor of a company with which his employer and its associated interests were engaged in litigation and then promptly using the debt as a basis to seek winding up of that company. If, on the evidence then available, the allegation of abuse of process were made out, that would be a barrier to the making of a winding up order. And if some collateral purpose short of abuse of process were established, that would be potentially relevant to the undoubted discretion that the court has regarding the making of such an order. Those possibilities lie in the future and there is no need to say more about them at this point.

41 Ash's amended interlocutory process filed on 2 December 2008 is dismissed with costs.

42 There is a need for these proceedings to be made ready for trial without further delay. I therefore direct that a pre-trial hearing be appointed before me as Corporations Judge at 10 am on 16 February 2009.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.